Standby Letter of Credit


Also found in: Acronyms.

Standby Letter of Credit

Documents evidencing failure of the bank's customer (the applicant) to pay an obligation when due.

Standby letter of credit

Agreement to guarantee invoice payments to a supplier; a standby LOC promises to pay the seller if the buyer fails to pay.

Standby Letter of Credit

A statement issued by a bank to the buyer of a good stating that the seller will receive payment on time and in the correct amount. If the buyer fails to make payment, the bank will do so on his/her behalf. The buyer presents a letter of credit to the seller, which virtually eliminates the risk that the seller will not be paid. Letters of credit have become very common in international commerce, as distance and other factors make it difficult for sellers to establish the creditworthiness of every buyer.

standby letter of credit

Usually shortened to standby or to LOC. It is the agreement by a lender to disburse funds to a third party if the lender's customer defaults on its obligations to that third party (called the beneficiary).

Rather than pay a large security deposit for a lease, a tenant might offer the landlord a standby letter of credit (LOC) issued by the tenant's bank. For all but the most exceptionally credit-worthy customers, the bank will usually require cash collateral in the form of a certificate of deposit or comparable asset.

The issuance fee is generally in the range of 1/2 to 2 percent per year for the issuance of the standby,which should be less than the money earned by the cash collateral.

The LOC will usually specify the exact manner in which the beneficiary must collect funds, such as presentation of the original LOC at a certain branch location to a particular officer at that location, accompanied by a statement regarding the customer's default. Normally, the statement must be worded exactly in the manner specified within the body of the LOC and any paraphrasing at all will result in denial of payment.The LOC will also have a date and time of expiration.

Landlords (or anyone else) accepting standby letters of credit should be aware that the law in this area is very precise in its requirements.In many states,minor errors in wording the documents presented in order to collect on a letter of credit might result in the bank's legally justifiable refusal to pay. Presenting documents to the wrong person, or at the wrong location, could result in refusal to pay.That refusal might not be curable because of the expiration of the time limits within which to make the claim.The better practice is to pay a lawyer with good malpractice insurance to review the documents and prepare the request for payment.

References in periodicals archive ?
(87) However, a new device called the standby letter of credit has become common, particularly after the adoption of Article 5 of the Uniform Commercial Code governing letters of credit in the 1960s.
Unlike a documentary letter of credit, the beneficiary of a standby letter of credit must first look to its customer for payment.
The standby letter of credit is an unsecured and unsubordinated obligation
He highlighted the creation of the Standby Letter of Credit process, the role that financing played in the Polish F-16 decision, and the significance of financing for the potential Czech Republic fighter purchase.
The applicant, the lessee, obtained a standby letter of credit in favor of the beneficiary, the lessor, to guarantee rental payment in advance.
Temporary Regulations 15 a.453-1(b)(e) said that a standby letter of credit is not payment under IRC section 453.
(1) Is not supported by any form of credit enhancement, including a guarantee or standby letter of credit; and
Given that one basic function of the letter of credit is to sever the source of the obligation to pay from the actual practice of payment, whether or not it operates primarily as a payment mechanism, studying the choice of a letter of credit over a secondary obligation such as the standby letter of credit promises a good chance to verify and expand on important recent work in the legal and economic foundations of the guarantee contract.(6) Mann's data and his analysis both make possible and demand a number of promising lines of future research.
Consistent with the certification hypothesis (e.g., Booth and Smith, 1986), the empirical results of the structural equation model suggest that the quality of the bank issuing the standby letter of credit is apparent in the initial pricing of the letter of credit-backed debt.
* A nonnegotiable, nontransferable standby letter of credit issued by a financial institution that does not allow the seller to draw on this letter except upon default by the buyer.
In a subsequent case involving a standby letter of credit, Griffith v.
Chinese investors have compelled the authorities to have a revolving fund for a standby letter of credit to ensure payment of their bills irrespective of what happens to domestic operators